"Futures at Discount"?

#1
This is novice question about futures...

Many a time, I came across the statements like futures were at discount...
For Ex.
Educomp Solutions January 2009 futures were at discount at 1522.05 compared to the spot closing of 1526.85.
What does it actually mean? Is it a +ve or -ve statement about the stock?

If a stock is trading at a discount two days before the expiry date (I think last Thursday of the month), can we expect the probability that the stock will rise in two days because of short covering?
 

Alchemist

Administrator
Staff member
#2
Usually, when there is a lot of shorting happening in futures, the futures trade at a discount.

If there is a dividend coming in the same series or if the stock is going ex-rights, then also the futures trade at a discount.

e.g. Price of ABC is Rs 100 and it will go ex-dividend (Rs 5) after 1 day. The futures expire in 7 days. In such a cash, the futures will trade at an approximate discount of Rs 5.

As far as Indian markets are concerned, I have never seen any correlation between discount in futures and price movement of the underlying stock.

In India, futures are cash settled.

Thus, those who sell in futures market have to buy back in futures market.

In markets where futures are settled by delivery, excessive shorts (futures) may have to cover in cash markets on expiry and this may lead to rise in prices.

Nothing like that happens in cash-settled futures.

When there is a big discount,

sometimes share price falls to meet the futures price; and
sometimes the futures price rise to meet the stock price.

In the example that you have given, the price difference between the cash and futures price is just 0.25%.

0.25% price difference is as good as no price difference.

If the price difference is in excess of 4%-5%, then you can say that there is significant shorting in the futures.
 
#3
When there is a big discount,

sometimes share price falls to meet the futures price; and
sometimes the futures price rise to meet the stock price.
Can you please explain how these two scenarios could happen?

Can you please take Reliance Infra for reference?
Reliance Infrastructure @485.20 is trading at 5.79% discount in futures.
 

vasa1

Well-known member
#4
Alchemist, my question is similar to the previous one.

Geojit's site has this:
Educomp Solution February 2009 futures were at huge discount at 1993.15 compared to the spot closing of 2090.35.
How can this information be used to profit?

Is this a risk-less operation?

Is it possible only for those holding Educomp shares?

Does one sell in the cash market and buy the futures? Will there be a minimum lot size?

On the same day, Geojit reported that:
Bharat Heavy Electricals February 2009 futures were at discount at 1451.30 compared to the spot closing of 1467.40.

Reliance Industries February 2009 futures were at discount at 1391.50 compared to the spot closing of 1392.40.
 

Alchemist

Administrator
Staff member
#5
How can this information be used to profit?

Is this a risk-less operation?

Is it possible only for those holding Educomp shares?

Does one sell in the cash market and buy the futures? Will there be a minimum lot size?
Only those who are holding the shares can taken advantage of such a discount.

If you have the shares in your demat account, you can sell them in the cash market and buy the futures.

Such a transaction is risk free provided the number of shares sold in cash market and number of shares bought in the futures market is the same.

The minimum lot size will be the futures lot size.

For those who don't own the stock, there is no arbitrage opportunity.
 

vasa1

Well-known member
#6
Alchemist, the next question, of academic interest, is why does such an opportunity (for those who hold enough shares) come about?
 

Alchemist

Administrator
Staff member
#7
Alchemist, the next question, of academic interest, is why does such an opportunity (for those who hold enough shares) come about?
if people expect prices in future to be lower than current prices, they short in the futures market.

such people don't own the stock and thus are shorting futures.

this creates an opportunity for those who hold the stock.

the stock holders can sell in the cash market and buy back in futures market.
 
#8
HDIL - Arbitrage Opportunity ?

Followed HDIL today and throughout the later half of the day I felt there was an arbitrage opportunity.

Then bought the futures @224 but could not convince myself to short the underlying :y:.

I thought the budget is not so bad for the Infra / Reality sector and its just profit booking.
I continue to hold the future and do not mind staying long till expiry.

Anyways, I want your comments on whether this was/is an Arbitrage opportunity at all ? and suggested actions for tomorrow?

 

Alchemist

Administrator
Staff member
#9
Anyways, I want your comments on whether this was/is an Arbitrage opportunity at all ? and suggested actions for tomorrow?
see post #5.

Anyone can take advantage of a futures premium by buying in the cash market and selling in futures.

However, old stock holders can take advantage of a futures discount.

HDIL in cash market has very strong support in the 190-210 range and I think this support range will hold for some time.

Overall market direction will also determine the direction of real estate stocks.

If this support breaks, the stock may crash to 165.

Do you want to keep a stop-loss?
 
#11
Anyone can take advantage of a futures premium by buying in the cash market and selling in futures.
:hmmmm2: Technically speaking, in the same way we should also be able to Sell in cash and buy in futures to avail ourselves of the discount.. can't we ?

As I said I can hold it till expiry, so not thought of any stop loss. But will keep 190 and 165 in mind as imp levels in case I go for it :)

panks
did u owned hdil .i mean was the stock was in your portfolio at the time of buying futures
No, I do not hold this stock. My initial thought was to short it intraday with same quantity as the futures lot.
 

Alchemist

Administrator
Staff member
#12
:hmmmm2: Technically speaking, in the same way we should also be able to Sell in cash and buy in futures to avail ourselves of the discount.. can't we ?
no, because if you don't own the stock, how will you give delivery for it?

futures discount can remain for many days and then slowly narrow as expiry approaches.
 
#13
:hmmmm2: Technically speaking, in the same way we should also be able to Sell in cash and buy in futures to avail ourselves of the discount.. can't we ?

As I said I can hold it till expiry, so not thought of any stop loss. But will keep 190 and 165 in mind as imp levels in case I go for it :)
Arbitrage in futures works only if one holds to positions till end of series.
to your question : buy in cash and sell futures works when futures is in premium.
sell in cash and buy futures works when it is in discount.
may be if you preowned the stock it was indeed a fantastic opportunity to pocket the discount

intraday shorting in lieu of delivery selling is a risky business as one has to close position at end of day.
 
#14
futures discount can remain for many days and then slowly narrow as expiry approaches.
Arbitrage in futures works only if one holds to positions till end of series.
I got the point now. I had a wrong impression that regulars arbitragers will jump in and fill the gap on the same day.
I had planned this arbitrage for INTRADAY :stupido2:

I am still happy to hold my position and hope I will not have to close it with a loss. Thanks a lot guys !
 
#15
Manipulation in stock futures?

Videocon Industries currently:

Cash market:215
June futures:218
July futures:178??

Is this sheer manipulation by biggies, or can one hope to cash in a bit (after expiry) by buying July futures now?
 
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